Trading Technology

12:45 PM
Ivy Schmerken
Ivy Schmerken
Commentary
Connect Directly
Facebook
Google+
Twitter
RSS
E-Mail
50%
50%

Nasdaq Systems Issue Impacts Short Sales, Points to Ongoing E-Trading Glitches

This is the latest in a series of technical glitches that have eroded investor confidence in the market infrastructure.

Nasdaq OMX Group notified customers on Tuesday that short sale orders may have run afoul of the SEC's rules due to a systems issue, according to a report in yesterday's Wall Street Journal.

An unspecified number of orders may have been executed in violation of the SEC's so-called alternative uptick rule, which the agency implemented in 2010 to prevent aggressive short sellers from beating down stocks that had already suffered significant price declines.

The rule, officially known as Reg SHO Rule 201, is triggered after a stock drops 10% in one-day, and then only allows a short sale after a price that is higher than the last trade, reports the article, Nasdaq: Short Sales May Have Flouted Rules.

But the short-sale glitch at Nasdaq could have implications for hedge funds, brokers and proprietary trading shops that make bearish bets on stocks by borrowing the shares and selling them short. They are betting on a price decline at which point they will buy the stock in the open market and return it to the lender, profiting from the difference in price.

This systems "issue" is the latest in a series of technical glitches in the U.S. stock market that is raising concerns about the safety and reliability of the infrastructure. It comes on the heels of Nasdaq's software problems with the Facebook IPO on May 19th followed by the software fiasco at Knight Capital on August 2, which led to erroneous trades that nearly destroyed the electronic market-making firm and forced it to seek a rescue by a consortium of outside investors.

Some capital markets participants are concerned that these shocks to the system are eroding investor confidence. Earlier this week, Tabb Group reported that only 2% of industry professionals rated their confidence in equity market structure as very high.

As some bloggers have suggested, the computerized stock market is proving to be more difficult to keep in line. With so many moving parts, exchanges, ECNs, dark pools, algorithms as well as interfaces, circuits, and protocols, changes in software can cause errors to creep in. While many pundits are urging the industry to invest more time in testing their applications, it appears that exchanges also need to install monitoring systems that catch such glitches. It becomes more evident with each episode, that electronic trading is more complex than anyone realized.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Why Settle for Less in the Front Office?
Recent research shows that sell-side firms are less than satisfied with their order management system (OMS) technology. Many front offices, however, continue to make do with their current solutions. Are they selling themselves short?
BYOD Policy: Don't Reinvent the Wheel
Financial firms still feel overwhelmed by BYOD risks and challenges. But these can be addressed by a good policy, and the guidelines are already out there.
The BYOD Challenge
Having a policy in place to manage mobile devices used by employees for work purposes is necessary in this current day.
Getting Onboarding Right in the Age of the Customer
Disparate “Frankenstein” systems slow down the onboarding process and impede customer service, says Pegasystems.
Performance Monitoring Key to Smooth Infrastructure Modernization
As banks consider how to shift infrastructure and storage solutions, they can’t afford to lose visibility into performance.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.